An 11th Hour Greek Deal?

The Athens Stock Exchange soared 8.5% this morning on hopes that a default would be averted.

But even if Greece does default, investors are betting that any financial contagion will be limited.

If investors believed a Greek default would call the solvency of other deeply indebted European nations, such as Spain and Italy, into question, the price of Spanish and Italian bonds would be in free fall. This is what happened in the summer of 2012, the last time the European financial crisis reached a crescendo.

But although yields – which move in the opposite direction to prices – on Spanish and Italian debt rose last week, they were up only modestly.

As you can see above, yields on Spanish and Italian 10-year debt are up 1 percentage point since their record lows in March.

But that’s still well below previous highs – a strong signal that any potential Greek default will be contained.

Spanish yields peaked at 7.6% in July 2012, while Italian yields hit a high of 7.2% in November 2011.